We are not on the path to economic recovery despite what the government and main stream media want us to believe. There are potentially catastrophic financial events coming in the near future that have been caused by underlying structural weaknesses in our economy have not been resolved. The kick-the-can-down-the-road plan is going to encounter a brick wall in the not-too-distant future. When the next moment of disruption finally arrives, events will unfold much more quickly than most people expect.

We live in a non-linear world. But far too many people expect events to unfold in a more or less orderly manner, with plenty of time to adjust along the way. In other words, linearly. The world does not always cooperate. We face the convergence of multiple trends, each of which has the power to transform our economic landscape and standard of living.

Three trends that will shape our immediate future are:

Peak Oil

Sovereign government insolvency

Currency debasement

Individually, these are game changers. Collectively, they have the potential to change the world as we know it.

History shows that instead of a nice smooth line heading either up or down, markets have a habit of jolting rather suddenly into a new paradigm, either higher or lower. Social moods are steady for long periods, and then they shift, sometimes dramatically. This is what we should train ourselves to expect.

Learning To Accept “What Is” Instead of “What Should Be”We must get our minds to accept reality without our beliefs interfering. I mean statements like these:

“Things always get better and are never as bad as they seem.”

“If Peak Oil were real, I would be hearing about it from trusted sources.”

“Dwelling on the negative is self-fulfilling.”

While each of these things might be true, they also might be false and misleading, especially during periods of transition. In order to prepare for what’s ahead it is key that we remain as dispassionate and logical as possible.

Let’s examine the three main events that are converging — Peak Oil, sovereign government insolvency, and currency debasement.

Peak OilPeak Oil is a matter of debate at the highest levels of industry and government. Recent reports by Wikileaks, the US Department of Defense, the UK industry taskforce on Peak Oil, and the German military are evidence of this. The debate is not about whether or not Peak Oil is real, only when it will arrive. The emerging consensus is that oil demand will outstrip supplies “soon,” within the next five years and maybe as soon as two. So the correct questions are no longer, “Is Peak Oil real?” and “Are governments aware?” but instead, “When will demand outstrip supply?” and “What implications does this have for me?”

It doesn’t really matter when the actual peak arrives. What matters is when we hit “peak exports.” My expectation is that once it becomes fashionable among nation-states to finally admit that Peak Oil is real and here to stay, one or more exporters will withhold some or all of their product “for future generations” or some other rationale (such as, “get a higher price”), which will rather suddenly create a price spiral the likes of which we have not yet seen.

What matters is an equal mixture of actual oil availability and market perception. As soon as the scarcity meme gets going, things will change very rapidly.

In short, it is time to accept that Peak Oil is real — and plan accordingly.

Sovereign InsolvencyOnce we accept the imminent arrival of Peak Oil, then the issue of sovereign insolvency jumps into the limelight. Why? Because the hopes and dreams of the architects of the financial rescue entirely rest upon the assumption that economic growth will resume. Without abundant supplies of oil, such growth will not be possible. In fact, we’ll be doing really well if we can prevent the economy from backsliding.

Virtually every single Organization for Economic Co-operation and Development (OECD) country, due to outlandish pension and entitlement programs, has total debt and liability loads that have resulted in a negative net worth for the governments of Germany, France, Portugal, the US, the UK, Japan, Spain, Ireland, and Greece. And not by just a little bit, but exceptionally so, ranging from more than 450% of GDP in the case of Germany on the ‘low’ end to well over 1,500% of GDP for Greece.

Such shortfalls cannot possibly be funded out of anything other than a very, very bright economic future. Something on the order of Industrial Age 2.0, fueled by some amazing new source of wealth. Logically, how likely is that? Even if we could magically remove the overhang of debt, what new technologies are on the horizon that could offer the prospect of a brand new economic revival of this magnitude? None that I am aware of.

In the US, the largest capital market and borrower, even the most optimistic budget estimates foresee another decade of crushing deficits that will grow the official deficit by some $9 trillion and the real deficit by another $20 to $30 trillion, once we account for growth in liabilities. This is, without question, an unsustainable trend.

It’s time to admit the obvious: debts of these sorts cannot be serviced, now or in the future. Expanding them further with fingers firmly crossed in hopes of an enormous economic boom that will bail out the system is a fool’s game. It is little different than doubling down after receiving a bad hand in poker.

The unpleasant implication of various governments going deeper into debt is that a string of sovereign defaults lies in the future. Due to their interconnected borrowing and lending, one may topple the next like dominoes.

It is when we consider the impact of Peak Oil on the story of growth that the whole idea of sovereign insolvency becomes much more probable.

We need to accept that there’s almost no chance of growing out from under these mountains of debts and other obligations. We must move our attention to the shape, timing, and the severity of the aftermath of the economic wreckage that will result from a series of sovereign defaults.

Currency WarsWe can make a very solid case that once a country breaches the 300% debt/liability to GDP ratio, there’s no recovery, only a future containing some form of default (money printing or outright default).

You can be nearly certain that every single country is seeking a path to a weaker relative currency. The problem is obvious: everybody cannot simultaneously have a weaker currency. Nor can everybody have a positive trade balance.

If a country or government cannot grow its way out from under its obligations, then printing (a.k.a. currency debasement) takes on additional allure. It is the “easy way out” and has lots of political support in the home country. Besides the fact that it has already started, we should consider a global program of currency debasement to be a guaranteed feature of our economic future.

ConclusionWe’ve identified three unsustainable trends. They are intertwined to a degree. I find no support for the idea that the economy can expand like it has in the past without increasing energy availability, especially oil. All of the indications point to Peak Oil, or at least “peak oil exports,” happening within a few years.

At that point, it will become widely recognized that most sovereign debts and liabilities will not be able to be serviced by the miracle of economic growth. Pressures to ease the pain of the resulting financial turmoil and economic stagnation will grow, and currency debasement will prove to be the preferred policy tool of choice.

Instead of unfolding in a nice, linear, straightforward manner, these colliding events will happen quite rapidly and chaotically.

By mentally accepting that this proposition is not only possible, but probable, we can make the choices and take the actions that can preserve and protect wealth and mitigate risk.

What changes in our actions and investment stances are prudent if we assume that Peak Oil, sovereign insolvency, and currency debasement are ‘locks’ for the future? More on that later.

Often one of the most reliable means of predicting the future is to look at the past. Historians such Edward Gibbons, who wrote The Decline and Fall of the Roman Empire, and Paul Kennedy, author of The Rise and Fall of the Great Powers have provided useful insights into the warning signs of imperial decline.

One of the most commonly cited warning signs is “imperial overstretch”, which is a mismatch between political and strategic goals and economic and fiscal reality. One has to look no further than US military spending. Current US military spending is equal to that of all other nations combined. The United States empire is also extraordinarily far flung. Defense Department data reveals that United States has 737 bases in 130 countries around the world. This does not include the 6,000 bases located in the United States and territories. In addition, the military owns or rents more than 28 million acres of land and $600 billion worth of real estate.

Another sign of impending imperial demise stems from a pattern of fiscal irresponsibility and increasing economic malaise. At the end of World War II the United States was producing about half of the world’s goods. Since then the country has lost significant ground economically, in part because of growth in in emerging economies, but also because of misguided policies that have encouraged the outsourcing of jobs and production to those same emerging economies, over-emphasis on financial “engineering” and a decaying work ethic. The United States has gone from being the world’s largest creditor to its biggest debtor. The US current account deficit stands at approximately 5.5 percent of GDP, more than $770 billion. This persistent and growing imbalance requires capital inflows of more than $2 billion per day, much of it borrowed from countries like the United Kingdom, Japan, China and Saudi Arabia.

Economic growth over the past 30 years has increasingly been fueled with borrowed money at all levels of the economy. The federal government has long run deficits in the multiple $100 billion range. Those deficits have been completely eclipsed by the current administration’s trillion dollar deficits. And there is no end in sight. At the end of 2009 total public and private debt reached and extraordinary 370 percent of GDP, based on data from the Federal Reserve. That far surpasses the previous record of 300 percent set at the height of the Great Depression. Stagnating inflation-adjusted wages, deteriorating household balance sheets, increasing inequality between the rich and everyone else, and the fallout from the devastating financial crisis only add to the decay.

Also marking the twilight of past empires has been what can be described as an epidemic of cultural, moral and social decline. The United States has gotten soft. People prefer watching or pretending instead of doing. Our public education system is arguably a joke.

Social standards have slipped. Manners and respect for the elderly have fallen by the wayside, replaced by crude language, widespread disrespect for authority and YouTube exhibitionism. Sound argument is overrun by sound bites and facts are eclipsed by feelings and fantasy.

The conclusion is inescapable. The United States is an empire in decline – economically and socially. The repercussions of that decline is something that nearly every American is going to have to live with. But that is the subject of another post.

On the subject of America in decline – Gains, Pains & Capital recently published a worthwhile article.